The Hidden Costs of Reverse Logistics, Part II

Last week we looked at three major categories of hidden costs within the reverse logistics process. This week we’ll view three more, as well as discuss how to go about automating the process.

Companies ignore reverse logistics at their own peril, because improving the returns process is a relatively easy way to move dollars to the bottom line. An automated reverse logistics operations—one in which both you and your channel partners use enterprise returns management software that offers rules-based, product-specific protocols for how to handle any returned items–can slash costs. Yet too many companies overlook the option—and, in fact, the reverse logistics process overall. As a result, just about any senior manager who cares to risk a look will see a great deal of money wasted on poorly managed reverse logistics. Here are three key problem areas:

Inability to forecast accurately. Detailed historical information about returns may be trapped in local Excel spreadsheets and static databases. Sales staff is often asked to provide forecasts for reserves, but they can see across the various stations and links in the supply chain to make those predictions accurate. Operations is unable to accurately predict whether additional (temporary) resources are needed to process a large influx of returns. They may be paying overtime to ensure internal cycle times are met, or upstaff too far in advance and have to send employees home early, if they have no returns to process.

Credit reconciliation. Large customers often calculate their own credits – and take a debit on next payment, which is a very labor-intensive problem to resolve in the accounting office. And that’s not the only reconciliation problem. Here’s another in a list that goes on and on: Return requests are approved, but not valued or matched against receipts. This prevents accurate accruals, claims recoupment and effective vendor management. Manually processing this information is a method made obsolete 30 years ago. It can be automated and integrated; the cost eliminated.

Poor response time and brand toxicity. Manual return request processing and validation cause delays in approving or rejecting return requests. This frustrates customers and communicates a lack of concern, which tarnishes your brand and drives up call and email volume. It also ties up customer funds and prevents more sales. So do delays in validation, discrepancies caught in receiving, and many other “simple” problems. Customers expect you to stand by your products during the entire lifecycle. They demand that your reverse logistics processes will work as well as your forward logistics. Do you have this same expectation and a path to implement enterprise reverse logistics to solve it?

Automating the reverse logistics process

Many insightful companies have been highly disciplined about returns authorization. This isn’t a new practice, especially in the after-market service and warranty sectors. A product can’t be returned until it has a returns management authorization label generated by the person returning the product. But excellence in the returns management process seems limited just with companies that do nothing but reverse logistics. That’s because the logistics team is already “thinking in reverse,” and it is rare – though less and less rare – to have the process automated at the industrial level for the return of a new sizeable quantity of otherwise saleable products.

A few approaches to reverse logistics have been tested and shown to be inefficient. For some companies, it seemed like a good idea to ship a product with a preprinted return label. This process guarantees just one thing: the returned inventory will be shipped to the proper address, because it is printed on the label. Beyond that, you haven’t advanced the data management process much, because these labels declare neither the quantity of goods, or if the return shipment is a mixed lot. Nor do they control the timing of the return of those goods.

Other companies have tried call centers. Fair enough, as you typically get the data right (or nearly right) with an agent, and you can even take time to sort through the various mix-matched SKUs in the shipment. But manual, human invention in a returns process (as with any supply chain task) is costly because it is time consuming. But, if you were to automate your reverse logistics with a Web interface that demanded an RMA and compliant label before any return – it would save 35%-50% over a live call center, research firm Gartner reports. If you were to set up an entirely Web-based RMA system that linked directly to your ERP, your company can save 505-80% over pre-printed return labels, again according to Gartner.

The return-on-investment for an “enterprise returns management” (ERM) system can be achieved in a remarkably short time, given the margins and the money now left on the table. Set up a Web-based RMA system, link it to your enterprise resource planning (ERP), and train your customers to respect and adhere to your rigorous returns process, as enforced by Web services.

Given the flexibility built into powerful ERPs for manipulating granular data, the wide availability of “distance printing” of customized “returns compliant” labels, and the availability of sophisticated Web services that can access and distribute data from a central ERP—and update that ERP on inventory heading back to the warehouse, and what to do with it once it arrives—and returns can be made easier.

Lee Norman is senior manager of enterprise returns management and John Reece is president of Austin, TX-based supply chain solutions provider ClearOrbit.

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